Investors will start this week off on the sidelines until the results of the Presidential election come in late Tuesday night. On the economic calendar, we have a quiet week with University of Michigan Sentiment.
Election: On Tuesday (11/8), Americans go to the polls to decide if a Giant Douche or A Turd Sandwich will become the next President of the United States. In the lead up to the election, we have seen the market drop as the polls have Clinton losing ground to Trump since the market has been pricing in a Clinton victory. Money market funds have also seen a surge in cash on the uncertainty around the election. Expect the markets for the first 2 days of the week to trade sideways until the outcome of the election is decided outside of some unexpected event (terrorist attack, the Earth gets hit by an asteroid). Here are the 3 scenarios we are likely to see Wednesday morning.
1: If we arrive at Wednesday morning without a decisive victor, or the opponent questions the outcome, expect the markets to drop given the uncertainty. The longer the outcome is in limbo, the farther the broader markets will drop. Expect a rush into safe haven assets such as gold or the Japanese yen.
2: If Clinton wins, expect the markets to increase and erase all the losses the market had experienced over the last week. Treasury prices will also increase. The status quo.
3: If Trump wins, expect a MASSIVE sell off. We will see a knee jerk reaction similar to Brexit. With Brexit, the broader markets sold off approx. 4% for the day. This time around, we could see anywhere between 5-10% for the day given the uncertainty with certain sectors falling further. I would say expect gold to rise. And as the Brainiac Gremlin said, put all of your money in “Canned food and shot guns”. https://www.youtube.com/watch?v=1JITC1fo2HA
If this scenario does play out, we will likely see central banks come in as a back stop to the sell-off. As that is happening, expect the US Dollar to weaken against major currencies on Trump’s potential protectionist policies. However, investors are already trying to figure out when to reenter the market once there is a sell off, which will propel the markets back up. Additionally, we obviously can’t see the future but we can look at the UK as an example of the market not pricing in the outcome and the results thereafter. Since the Brexit vote 4 months ago, the fear mongering has not come true and the UK’s stock market is now at record highs with the British Pound at 30 year lows.
Earnings: Earnings for the 3Q winds down as we have now had 423 companies in the S&P 500 report earnings to date. According to Thomson Reuters I/B/E/S, of the 423 S&P 500 companies that have so far reported, 53% reported revenue above expectations while 71% have reported earnings above expectations. That number is now closer to earnings long term average from the past four quarters of 70%.
FOMC Members Speak: 2 FOMC members (James Bullard and Stanley Fischer) are scheduled to speak this week. This will also be the FOMC member’s first public reaction to the Presidential election. Since the FOMC only has 1 more meeting this year, and continues to say there will be 1 rate hike this year, we will wait to see if they hint as to following through with the potential raise.
China: We have another week of solid Chinese data coming out including CPI, Trade Balance and PPI. Investors will continue to monitor the data and the Yuan’s reaction as downward pressure on the currency also shows global markets slowing, lowering markets.
Oil: In the past week, oil suffered its biggest weekly loss since January. Oil trailed lower after Saudi Arabia said it would raise its oil output if Iran refuses to limit its supply, US crude inventories surging, and the US oil rig count climbing to 450, its highest total since February 2016. This week, traders will be monitoring the latest rhetoric from Saudi Arabia and Iran. If they can come to a compromise (which I doubt), expect oil to rise. If they fail to come to terms, expect oil to fall closer to the $40 level. We will also continue to monitor crude inventories and the US oil rig count. If additional rigs do come online, we could see oil fall from the increased production.